capital gains

Your money may be under the IRS’ microscope in 2024.  You may have heard cries of “Tax the Rich” recently in articles, speeches, primary posturing, and most probably at the State of the Union. New IRS audits of business aircraft use are just the beginning of a new level of scrutiny to come. It seems U.S.A. millionaires and billionaires are evading more than $150 billion a year in taxes, adding to growing government deficits and creating a “lack of fairness” in the tax system. Can a “minimum tax” be far behind?

Of course, if you are wealthy you might want to argue that tax hikes for the top 1% will not fully solve the entitlement crisis, prop up Social Security for the foreseeable future and instead will hurt economic growth. States that have raised taxes on the ultra-rich have not increased revenue, in fact the millionaires and billionaires just picked up and moved to a more tax-friendly state.

On another note, the good news for the mega-wealthy is that inflation eases the 2024 tax bite on capital gains, estates, and other wealth-related income. Next year, long-term investors will see more of their capital gains fall into lower tax rate brackets. If you turned your market savvy into millions, you can pass along even more of your estate tax-free to heirs, even while you’re still alive.

Capital Gains Tax

If most of your income is a result of your investments, you know that when investments are long-term, the profit they produce is taxed at a lower rate. The tax rates on the proceeds from assets held for more than a year are 0%, 15%, and 20%. Which one applies depends on your overall income and filing status.

Thanks to changes made by 2017’s Tax Cuts and Jobs Act (TCJA), there are separate income brackets for the three capital gains tax rates. The earnings to which the three long-term capital gains tax rates will apply in 2024 are shown in the table below:

(In addition to capital gains tax rates listed in the tables, higher-income taxpayers may also have to pay an additional 3.8% net investment income tax.)

Capital Gains Taxes on Estates and Trusts

For 2024, the maximum zero capital gains tax rate applies to estates or trusts worth up to $3,150. The top earnings level for an estate or trust to be taxed at 15% is $15,450. The 20% rate applies to the entities worth $15,451 or more.

Five years ago, the TCJA expanded the estate tax exemption amount even more (at least until the TCJA expires at the end of 2025 or is changed before then). The exemption also is adjusted for inflation. For 2024, the inflation adjustment means an individual can leave heirs a tax-free estate of up to $13.61 million. That’s per person, so a married couple can protect $27.22 million from estate taxation. When an estate exceeds those tax-year amounts, then and only then is the federal estate tax, which can go as high as 40%, assessed on the overage.

Estate and Trust Tax Rates

There’s also a tax, with its own rate schedule, on earnings from trusts and estates. This applies to income that trustees choose to retain rather than distribute to beneficiaries. The estate and trust tax rates for 2023 and 2024 are shown in the table below:

(A dozen states and the District of Columbia still have either an estate or inheritance tax.)

Tax-Free Gifting

Want to share your wealth while you are still around to get a thank you for your generosity? Giving away some of your assets could help keep your some of your estate out of Uncle Sam’s hands when you pass on. The tax code allows you to give a specific amount, known as an annual exclusion, in gifts to others. This will help reduce your estate’s value and there’s no tax ramifications for the gift recipients.

For 2024, that exclusion amount is $18,000 per person. Like the estate tax exemption, the gift exclusion limits each year are per person. That means if you’re married, you and your spouse each can give a combined $36,000 to the same person in 2024, and there’s no familial relationship requirement.

Also, the gifts are not limited to dollars. You can give assets valued up to the limit, such as gifts of real property and family heirlooms. This is a good way to dole out your estate the way you want and keep its value under the amount that will trigger the federal estate tax. as long as you follow the rules, you won’t face any gift tax, and your gifts are not taxable to the recipients.

However, if you go over the lifetime gift exclusion, you will owe a 40% tax on those excessive gifts. The lifetime gift exclusion is the same as the annual estate tax exemption amount. Again, thanks to inflation that’s $13.61 million (or $27.22 million per married couple) in 2024.

REACH OUT TO US: Wealthy enough to worry about the latest estate and other wealth-related taxes and the inflation adjusted amounts? When it comes to inter-generational income and how to enhance it, preserve it, and distribute it wisely, things can get complicated. To be sure every transaction is tax-advantaged, and every outcome perfectly positioned for the future, it is important to work with a financial and tax adviser like those at TFG Financial Advisors. Even if your wealth is still in the aspirational stage, you should consider working with a wealth management professional to protect your nest egg. Feel free to contact me, Cory Lyon, directly at 561-209-1120, with any questions. At TFG Financial Advisors, our goal is to assist you in making informed decisions. We believe in personalized asset management, and I act as a fiduciary for all my clients.

TFG Financial Advisors, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.